While China’s coal consumption growth has slowed down, and fell in 2014, coal-fired power generating capacity continues to grow rapidly. This apparent contradiction has led some observers to conclude that China’s coal consumption growth is bound to resume. In reality, continued buildup of coal-fired power plants represents an investment bubble that will burst as overcapacity becomes too large to ignore.

If there is one factoid that every media consumer knows about energy in China, it must be that the country is “building one coal power plant per week”. While coal-fired power generation capacity growth has slowed from the peak years – 2006 saw the equivalent of 1.5 large units added every week – the rate of coal-fired power plant additions and construction initiations in China is still breathtaking: 39 gigawatts were added in 2014, or three 1000MW units every four weeks, up from 36 gigawatts in 2013.

At the same time, power generation from coal fell by approximately 1.6% in 2014, due to record increases in power generation from hydropower, wind, solar, nuclear and gas, along with slower power consumption growth. Total coal consumption, including coal use outside of the power sector, fell by anywhere between 0.5-2.5% according to different preliminary statistics and estimates.

In fact, coal-fired capacity growth has outstripped coal-fired generation growth since 2011, leading to dramatically reduced capacity utilization and financial pain to power plant operators. The headline making the rounds in China is that capacity utilization, at 54%, was at its lowest level since the reforms of 1978 (which is when statistics began to be made available).

Source: Compiled from China Electricity Council statistical releases

Outlook for coal-fired power generation in China

The Obama – Xi deal on peaking China’s CO2 emissions before 2030 has grabbed the headlines in English-speaking media, leaving many observers with the impression that China is planning to slack for another 15 years before starting to pull its weight in cutting CO2. However, real action is in theimplementation of China’s energy targets for 2020 and the air pollution action plans for 2017. For the power sector, the most impactful target is for non-fossil energy to make up 15% of all energy consumed in China.

Hitting the 15% target will require raising share of renewable energy and nuclear power in power generation from 22% in 2013 to 33-35% in 2020. Gas-fired power generation is also forecast by the IEA to grow to around 5% of total power generation, implying that the share of coal will shrink to about 60% in 2020, from 72% in 2013. This will require almost doubling non-fossil power generation from 2014 to 2020, meaning that, on average, non-fossil power generation will have increase as much as it did in 2014, every year until 2020. As in so many other respects, the radical changes in 2014 were not a one-off anomaly, but the “new normal”.

As a result of booming non-fossil power generation, even assuming GDP growth of 7% per year until 2020, growth in coal-fired power generation will be limited to around 1.5% per year on average, slowing down towards 2020 as non-fossil generation additions are ramped up. Together with a targeted 0.7% per year reduction in coal use per unit of power generated, this means that coal use growth in the power sector will average less than 1% and will stabilize before 2020. If capacity utilization is to return to financially sustainable levels, there is room for little more capacity to be added until 2020.

Source: Calculated from State Council Energy Plan for 2014-2020 and IEA New Policies scenario

So what’s the deal with all the new coal power plants?

To grasp why coal-fired power plants can still get built in the face of a worsening overcapacity problem, it is necessary to understand the basics of China’s economic model. The country’s growth miracle has been based on an economic system designed to enable extremely high levels of investment spending, particularly by state-owned companies and local governments. These actors have a very liberal access to near-zero interest loans from state-owned banks, and state-owned companies are generally not required to pay dividends to the state, enabling (or forcing) them to re-invest their profits. Banks exercise minimal due diligence on loans, which have implicit government backing. As a result, investment spending now amounts to over 4 trillion USD per year, making up a staggering 50% of China’s GDP, higher than any other major economy in history, and compared to around 20% in developed economies.

This model served China well for decades, enabling the growth miracle and lifting hundreds of millions from poverty. However, finding profitable and sensible investment projects worth trillions of dollars every year is bound to become harder and harder as the investment boom goes on. Recently published research estimated that 67 trillion yuan (US$11 trillion) has been spent on projects that generated no or almost no economic output – ghost cities being the most famous example.

In this context, it is not too hard to see how investment in coal-fired power plants can speed way ahead of demand growth. A new coal-fired power plant will still generate power and revenue even if there is overcapacity, as the lower capacity utilization gets spread across the entire coal power fleet and across all power plant operators.

What does continued coal-fired power buildup mean for the climate?

The conventional assumption in power business is that once a coal-fired power plant or other capital-intensive generating asset gets built, it will run pretty much at full steam for 40 years or more. Even if there is overcapacity at the moment, demand growth will raise utilization and the existing capacity will crowd out future investment.

However, this is not how things work in China. The government is not going to scrap the internationally pledged 15% non-fossil energy target for 2020 because of excess coal-fired capacity. Rather the overcapacity will lead to losses for power generators and will be eliminated by closing down older plants, as has happened with coal mining, steel and cement already.

Therefore, continued investment in coal-fired power plants does not mean locking in more coal-burning. It does, however, mean massive economic waste, and a missed opportunity to channel the investment spending into renewable energy, enabling even faster growth. Furthermore, the underutilized coal-fired capacity can exacerbate the conflict between coal and variable renewable energy in the grid, as grid operators are known to curtail renewable power in favor of coal.

Hence, investment in coal-fired power plants needs to be rapidly scaled back by restricting approvals and finance for new coal. The first step has already been taken with China banning new coal power plants in its three key economic regions, home to one third of currently operating coal-fired capacity.

This article is published in collaboration with The Energy Collective. Publication does not imply endorsement of views by the World Economic Forum.

Author: Lauri Myllyvirta works at Greenpeace International to support the organization’s coal campaign work in priority countries, with a focus on air pollution issues and analysis of energy and CO2 trends.

Image: The sun is seen behind smoke billowing from a chimney of a heating plant in Taiyuan, Shanxi province. REUTERS/Stringer.